EDITORIAL: The stock market benchmark, yet again, crossed another psychological barrier, this time of 66,000 points, gaining at least 54.5 percent since Pakistan reached a staff-level agreement (SLA) on the Stand-By Arrangement (SBA) with the International Monetary Fund (IMF) on 29 June 2023.
The linkage with the Fund’s programme was critical in deferring the threat of default that had been looming large on the horizon; however, the Fund loan Board approval on 12 July 2023 was not followed by an upgrade by international rating agencies, which continues to act as a dampener on the capacity of the government to borrow commercially from abroad (budgeted at 4.59 billion dollars – 1305 billion rupees with the exchange rate projected at 284 in the budget documents) or to issue sukuk/Eurobonds (budgeted at 435 billion rupees or 1.5 billion dollars) as the rate of return on the market is simply too high.
This was acknowledged by the Caretaker Finance Minister during a recent interaction with the media. It is imperative that the government seeks to convince the international rating agencies that the country is embarked on the straight and narrow path of identified structural reforms, which may, in turn, lead to a possible upgrade.
As matters stand today the perception is that the country would require another programme loan by mid-April 2024 after the scheduled conclusion of the SBA.
There is no doubt that in the event that the Special Investment Facilitation Council (SIFC) is successful in transforming the legally non-binding Memoranda of Understanding signed with various Gulf Cooperation Countries into binding contracts Pakistan’s rating would improve.
The rupee began weakening against the dollar a week prior to the arrival of the Fund mission to undertake the mandatory first review of the SBA on 2 November 2023. The SLA was reached on 14 November 2023, announced a day later, without any hiccups, unlike the consistent failure to reach an SLA on the ninth review pending since early November 2022, which ultimately led to the suspension of the then ongoing programme.
At its peak the rupee strengthened to 274 rupees to the dollar (bid) in the open market on 17 October attributed to a crackdown on foreign exchange players, which was fully supported; on the day the Fund mission leader announced the SLA on the Fund’s website the rupee rate was 286 to the dollar.
Since then the rate has hovered around 284 rupees to the dollar and it is relevant to note that the SBA documents dated 30 June 2023 project an exchange rate 286.7091 rupees and though indicators may have changed yet till such a time as the first SBA review detailed documents are uploaded on the Fund website the earlier projection will stand. Be that as it may, the press release issued on 15 November notes the following: “returning to a market-determined exchange rate.
While inflows following increased regulatory and law enforcement helped normalise import and foreign exchange payments and rebuild reserves, the authorities recognise that the rupee must remain market-determined to sustainably alleviate external pressures and rebuild reserves.
To support this they plan to strengthen transparency and efficiency of the FX market and to refrain from administrative actions to influence the rupee.”
The government has also successfully launched a crackdown on electricity theft and commodities markets, particularly wheat and sugar. This too can be supported; however, these measures are not standalone and unless accompanied by structural reforms that are clearly and unambiguously noted in the SBA, as in previous Fund programmes, the economic impasse is unlikely to be lifted.
While it is necessary that the ongoing crackdown in various markets must continue, it is equally important that the Caretaker government should supplement these salutary efforts with implementing politically challenging reforms that no previous elected government has shown any inclination to launch.
Copyright Business Recorder, 2023
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